US rates pricing becoming more aggressive but the US 2 versus 10Yr yield curve inversion suggests may not be enough to avert US recession

US rates pricing becoming more aggressive but the US 2 versus 10Yr yield curve inversion suggests may not be enough to avert US recession                

• US bond market flashes “red” - Record lows in the UST 30Yr yield of 2.0139% overnight, along with the UST 2Yr versus 10Yr cash curve’s first inversion since 2007 – a sign of a possible on coming US (and perhaps even a global) recession, drives a global risk rout Wednesday. Equities trade in the red (Dow Jones closes down 800 points), EM FX comes off and safe havens (JPY, CHF and Gold) appreciate. Fed rates pricing rebounds to once again pricing -33bp of cuts in September, up from -29bp on Tuesday while sentiment suggests that “further yield curve flattening /inversion still looks likely (despite increased Fed rate cut pricing).           

• Gains in USD overnight come primarily against EUR (due to weaker euro zone data – refer to euro zone section). Meanwhile, FOMC pricing rebounds to once again to price -33bp of cuts in September, up from -29bp on Tuesday and a total of -67bp of Fed cuts to year end with a 1.00% terminal rate in late 2020/ early 2021. Despite the more aggressive Fed rate pricing however, the UST curve continues to flatten/ invert – suggesting that even the more aggressive Fed rates pricing may not be enough to avert a US recession.             

• US Commerce Secretary Ross reiterates that Tuesday’s tariff delay decision is made for US consumers ahead of Christmas season - not a 'quid pro quo' with China. Meanwhile, Peter Navarro, White House trade adviser shares that that “seven structural issues remain in China talks,” and confirms Tuesday’s news that a phone negotiation session will be held in two weeks. Details on those seven issues however are not made clear, though investors think he is likely referring to at least these five - intellectual property rights, market access, SOEs, currency manipulation and Huawei. President Trump also holds his position, with a late NY tweet as evidence - "We are winning, big time, against China. Companies & jobs are fleeing. Prices to us have not gone up, and in some cases, have come down.” As for his “winning” claim, the recent Pew survey results argue to his point of view. The study suggests that public opinion is in Trump’s favor for protracting the trade war, an important consideration into 2020 elections.            

German GDP contracts, forward indicators look dismal; Upside surprise to July CPI leads to UK yield curve inversion    

• German Bund yields print a fresh record low at -65.6bps post the German GDP report while EURUSD sells off to 1.1140 as German GDP falls -0.1%QoQ in Q2, though less than Citi analysts call for a -0.2% contraction and with upward revisions to previous data. Meanwhile euro zone GDP slows to 0.2%QoQ (0.4% prior). More importantly, forward-looking indicators such as manufacturing PMI and the ZEW/ IFO surveys suggest the German economy will likely continue to lose momentum in Q3 and the data reinforces the case for Citi analysts’ call for fiscal stimulus in Germany and monetary stimulus from the ECB at its September 12th meeting.    

• An upside surprise to UK’s July CPI overnight but as with the US, the resulting UK yield curve inversion for the first time since 2008 overnight leads to recession talk. For the record, UK headline CPI comes out better than expected in July with the month-on-month print flat at 0.0% for the second month in a row but better than the consensus forecast of -0.1%MoM. This, in turn sees the headline year-on-year figure rising to 2.1%YoY (vs. a consensus of 1.9%). 

• Stronger wages growth and higher inflation leaves BoE in a tricky position as it heads towards its September 19 meeting. So far, Governor Carney and co have stubbornly stuck to their tightening bias on the assumption of a smooth Brexit, even while noting that an uptick in global growth would be a necessary hurdle before any hikes. But the worsening political outlook reaffirms Citi’s view that the BoE’s tightening bias is likely to be  dropped in September with a November cut increasingly likely.          

Australia - enough in August consumer sentiment and Q2 wages data to keep RBA patient        

• •Australian consumer confidence rises 3.6% in August following the 4.2% decline from July. Much of this though is likely due to data showing a trough in housing.  Meanwhile, Q2 headline wage cost growth is stronger than expected at 0.6% versus Citi expectations for a 0.5% gain though led by public sector wages while private sector wage growth remains soft. Implications for monetary policy - wages result is in-line with the RBA’s freshly minted forecasts from last Friday’s SMP of 2.3% and does nothing to change the RBA’s dovish stance to year-end.

• Markets await this morning’s July Labor Force data with Citi analysts forecasting a rise in unemployment rate from 5.2% to 5.3%.   

China – poor economic data adds pressure for stimulus  

• China’s Fixed asset investment weakens with headline FAI growth posting a 5.7%YoY Ytd growth rate in July, lower than 5.8%YoY Ytd in June. REI growth weakens from 10.9%YoY Ytd in June to 10.6%YoY Ytd in July with Citi analysts expecting it to continue to decelerate. Retail sales decline more-than-expected with nominal retail sales growth slumping from 9.8%YoY in June to 7.6%YoY in July, well below market expectations (Citi/Mkt: 8.8%/8.6%). Industrial production pulls back sharply with growth of value-added industry (VAI) falling from 6.3%YoY in June to 4.8%YoY in July and with manufacturing leading the overall production slowdown. In the only bright spot, MI growth continues to recover from 3.0%YoY Ytd to 3.3%YoY Ytd. But even here, growth seems to be mainly driven by public investments, as private FAI actually softens. 

This is an extract from the Daily Currency Update, dated August 15, 2019. Please approach a Citigold Relationship Manager if you would like more information.